Oil Rainbow of Orenburg | |||
The maturity of oil fields, and the subsequent debate about the viability of long-term production, is one of the most popular topics among analysts and industry experts when it comes to discussing the future of Russia’s oil sector. Add to this the complexity related to the vast number of not particularly large oilfields, relatively high-density of population, compared to the well-known open spaces of Western Siberia, and a mixture of other economic activities including agriculture that take place on the same location, and you will see a picture that may not look at all like a lucrative business model for oil production.
Well, not in Orenburg — one of the country’s oldest hydrocarbon provinces in operation. TNK-BP’s Orenburg business unit is nothing short of thriving. With production steadily growing over the past five years, the unit is set to boost output even further in coming years thanks to methodical exploration, acquisition of new reserves as well as precise and careful management of existing fields, says Alexander Berman, Orenburg Business Unit leader.
«This year we will produce 17.3 million tons of oil, next year we plan to pump between 17.5 and 17.6 million tons, in 2010 — 18 million tons and in 2011 — 19 million,» Berman says.
The growth, previous and future, however, comes along with a whole range of problems that are not common for other TNK-BP’s units.
Key facts about Business Unit Orenburg
In 2003—2008
- 32% rise in crude production
- 65% rise in development drilling
- 151% rise in exploration drilling
- 429% rise in taxes paid to budgets of all levels
Second Baku
The history of hydrocarbon production in Orenburg is a long one. First oil — an oily liquid — was discovered along the shores of the Sok river back in 1752. However, attempts to explore or in any way industrially use the oil from the region suffered a series of haphazard halts for another 170 or so years, until the discovery of oil in the Urals in 1929 clearly indicated that the whole region should be looked at as a prospective source of hydrocarbons. Subsequent research yielded the first gusher near Buguruslan in the Orenburg region on March 28, 1937. Others followed. The convenient proximity of the newly discovered field to existing infrastructure also meant that further exploration and development could progress relatively fast by the standards of the time. The additional haste was added by the Nazi attack on the Soviet Union in 1941, which meant that Orenburg had to quickly become an important source of energy for the fighting nation.
Geography of production
Orenburg region*
*
OJSC Orenburgneft has 106 licence areas and 88 oil fields in its asset portfolio.
Key producing assets are concentrated in the Orenburg region where oil is produced in the Abdulinsky, Aleksandrovsky, Asekeevsky, Buguruslansky, Buzuluksky, Grachevsky, Kurmanaevsky, Matveevsky, Novosergievsky, Pervomaisky, Perevolotsky, Ponomarevsky, Sorochinsky, Totsky, and Sharlyksky regions.
TNK-BP has three oil producing production units in the Orenburg region which are formed on the basis of OJSC Orenburgneft – Sever, Yug and Centre as well as production unit Gas (on the basis of the Zaikinsky gas processing plant and gas assets of the oil and gas production divisions of OJSC Orenburgneft). Head office of the company is located in Buzuluk.
Saratov region
Samara region
Astrakhan region
«It was lucky that oil in Orenburg, just like in Saratov and Samara, was discovered before the war. So the resources that were needed were coming from our region too,» Berman says.
Production at Orenburg increased sevenfold between 1940 and 1945, with teenagers and women being the main labor force on the wells. From 40.5 thousand tons of oil pumped in 1940, output jumped to 275.5 thousand in 1945. That year, the entire Volga-Urals oil-bearing province had earned the reputation of the second Baku for its input into the country’s economy during the war.
After the war Orenburg saw some ups and downs, including production peaks in late 1970s, followed by a steady decline that lasted from 1980s all the way to the late 1990s.
Winds of change
«The whole region was rather archaic prior the arrival of TNK in 2000,» Berman says. «Everyone worked without much rush. The profits were left in the company, but used for some incoherent loans and expenditures.... About half of the oil-wells were rented out.»
Just like most Soviet-era enterprises, Onako — the state-controlled oil business that existed in the region after the collapse of the Soviet Union in 1991, and Onako’s Soviet predecessors — were more than just an oil company. It was more like a large, not particularly well-shaped, but heavily multi-tasking enterprise, whose activities spread well beyond oil-pumping. It maintained farms, plants, schools and housing communities.
The arrival of TNK brought about a rapid campaign aimed at recovering core assets, shedding non-core businesses and optimizing staff schedules. Berman admits that these steps were perhaps not among the most popular among local people, but proved to be right.
«It is much better to have a transparent relationship with the regional administration through paying taxes, than to have to make odd and unclear donations and support non-core, money-losing enterprises, which do not do anything good either for the company or for the region,» Berman says.
The oilmen to this day offer help to the region in the form of funding special projects or helping rural communities with building essential infrastructure like water supply systems or local gas pipelines. But these come as friendly gestures and are unrelated to the company taxes or other official contacts with the authorities.
Further transformation took place when TNK-BP was created five years ago through what at the time was the largest FDI deal. According to Berman, TNK’s foreign partners added a more weighed and balanced approach to business.
«TNK was a pretty aggressive company. BP added a more systematic, look before you leap approach. And, of course, more emphasis was put on safety issues — ecological and industrial,» Berman says, adding that at the time Russian companies had just began to understand the importance of the company’s reputation.
«I have to admit, one feels much better when the spillage shrinks by half, and the need to settle conflicts with locals over the spillages also halves,» Berman says. «People appreciate such things. Just like they appreciate the extinguished flares.»
Extinguishing flares that burn associated gas that comes out of wells has been an important program for TNK-BP in the region. At a cost of $600 million the company plans in the next few years to begin utilizing some billion cubic meters of gas, most of which is still burned. This year, seven flares have already been shut, reducing the amount of wasted gas by 100 million cubic meters.
But even with TNK’s pro-active approach to business and BP’s strategy and experience, Orenburg is in many ways unique and demanding region to run a business in.
Oil rainbow
«One of key aspects of oil production in Orenburg... is the large number of small fields,» Berman says. «We have over 100 fields in our region, and that’s probably over half of all the oil fields currently operated by TNK-BP.»
According to Berman, the large number is not the only difficulty. The relatively small size of the fields and their vast distribution also mean that a gentle approach is needed when it comes to developing them.
«If developed aggressively, a small field containing some 300 thousand to 400 thousand tons would run out fast. So these require being gentle and precise... More pressure and the field could be killed altogether,» Berman says, adding that many of the projects that he runs require much more precise economics to maintain viability.
The large number of fields also means a multitude of different types of oils that they produce.
«It’s anything from Urals to Brent in terms of quality,» Berman says, adding that the oil samples from fields like Pervomayskoye resemble a rainbow with oil, ranging in color from green to orange and many colors of the spectrum in between. Such variety also means that the company has to have a more diversified system of transporting and selling the oil.
But if the above problems are not difficult enough, there are more. Unlike some of the areas in Western Siberia, Orenburg has industries other than hydrocarbon production.
«A very specific aspect of our work in Orenburg is that oil production is deeply integrated with agriculture,» Berman says. Indeed, a field of wheat with a carefully placed oil-well or two in the middle of it is not an uncommon scene in the region. But such proximity not only provides for a curious landscape, but also causes problems.
The problems mainly have two origins, Berman says: The changes to laws that arrive well after the fields were first ploughed and oil-wells first drilled, and the fact that land owners are becoming ever savvier as they realize that an oil company with a well on their territory is a good source of regular income.
«There is a whole new generation of land owners, who understand that renting the land to oilmen is much more profitable than trying to grow anything on it,» Berman says. «It is much easier to negotiate such things somewhere in West Siberian tundra.»
Compared to Western Siberia, Orenburg is a web of land plots, all of which have in recent years been assigned to various purposes, like industrial or agricultural use.
«But when some
It’s all about reserves
Berman seems unabashed by difficulties and loves talking about the grand plans of Orenburg’s production expansion.
The team working in Orenburg has accumulated enough knowledge and expertise to move into other oil-bearing regions of Russia. “We are present in five Russian regions,” proudly says Berman, “One is oil production; in two others we are starting to produce oil virtually tomorrow; in the fourth one our team is engaged in exploration activities; and we own infrastructure facilities in the fifth region.” Besides producing oil in the Orenburg region, TNK-BP specialists from the local business unit are implementing seismic and will be next year launching exploration drilling in the Samara and Saratov regions. Seismic exploration has been also carried out in the Astrakhan region, and TNK-BP’s business unit in Orenburg owns a metering station and a pipeline stretch in the republic of Bashkiria. There is space to grow in Orenburg itself as the company is nurturing plans to expand its presence in the eastern part of the region.
The unit is beginning to venture into a search for natural gas. Although another couple of years might be needed to pinpoint industrial-size reserves, early data has already proved that some of the licenses controlled by TNK-BP in the area look very promising.
“We have historically been an oil company, but one of the things we are finding in Orenburg is that there is potential to grow a material gas business,” says Chief Executive Officer Tim Summers, “In a few years’ time, we may well see TNK-BP’s business in the Orenburg region become as much a gas business as an oil business.”
Berman says he wants natural gas to represent 30 percent of the unit’s reserves, compared to current 10 percent.
The core business — oil production — is also not to be overlooked.
Production in Orenburg had already surpassed the all-time Soviet record of 1978 back in 2003, when output grew by an astonishing 27 percent in a single year.
That record was followed by 18 percent growth in 2004, another 8 percent in 2005 and another 1 to 2 percent yearly in 2006 and 2007.
The slowdown in the output growth that has been registered in the past couple of years is only a pause for yet another jump, Berman says.
Crude oil production dynamics
Nature protection outlay
According to Berman, the company has rethought its strategy since the 27 percent growth rate in 2003.
«In fact, I can tell you — 27 percent growth is not right. It’s too fast. We hadn’t had time to match our own output hike with documenting our work, or the necessary engineering,» Berman says.
So in more recent years more effort has been put in reserves accumulation.
«Yes, today we have stabilized the output growth at just 1 or 2 percent a year, but we are preparing a launching pad for the new growth. We are actively adding new reserves.» Berman says.
In 2006, Orenburg managed to add 140 percent to its reserve base. This achievement was followed by 180 percent in 2007 and 2008 is also expected to deliver an impressive result.
According to Berman, about a third of the newly added reserves are a result of exploration, another third is finding reservoirs and traps in brownfields that were previously missed, and the rest comes from recalculation of existing reserves.
Behind the reserves increase are a number of factors, Berman says, which include the application of up-to-date technology like 3D and even 4D seismic acquisition.
Richard Herbert, Executive Vice President Technology from Day 1 to the end of 2008, has a vivid recollection of how technology worked wonders in the region: “Orenburg is a great example of using 3D seismic — new technology which was not used there before. One of the licences we acquired there is called Buzuluk with a few fields sitting inside it, some them quite large and mature. We thought, “Interesting, this is an old basin which has been explored for over 60 years, but there is no modern data.” So, we’ve covered it wall to wall with 3D, which was very brave because we’ve never done any exploration 3D before than. We found about 35 reefs and structures.”
The company started a drilling campaign in Buzuluk. This year three wells will be drilled in the area which have a potential to bring new discoveries.
«No one in the world has come up with a method to maintain output other than adding new resource bases,» Berman says. «We have always understood that in order for the output not to fall, new reserves must be added.»
As a result, Orenburg’s reserves-to-production ratio grew from 14 to 17 in a few years. These reserves will be the base for the planned production growth that is expected to reach 19 million tons per year in 2011 from 17.3 million expected to be produced this year, while the growth rate would be 4 to 5 percent a year.
«Our
Oil rainbow of Orenburg (1,68 MB)